Characteristic features of an oligopoly. Oligopoly The main distinguishing feature of an oligopolistic market is

An oligopoly is a market structure in which a small number of sellers dominate and the entry of new producers into the industry is limited by high barriers.

The first characteristic of an oligopoly is that there are few firms in the industry. This is evidenced by the etymology of the very concept of "oligopoly" (Greek "oligos" - several, "poleo" - I sell, trade). Usually their number does not exceed ten Fischer, S. Economics / S. Fischer, R. Dornbusch, R. Schmalenzi. M., 2010. P.213.

The second characteristic feature of an oligopoly is the high barriers to entry into the industry. They are connected, first of all, with economies of scale of production (scale effect), which acts as the most important reason for the widespread and long-term preservation of oligopolistic structures.

Economies of scale are an important but not the only reason, as the level of concentration in many industries exceeds the optimally efficient level. Oligopolistic concentration is also generated by some other barriers to entry into the industry.

The third characteristic feature of an oligopoly is universal interdependence. An oligopoly occurs when the number of firms in an industry is so small that each of them has to take into account the reaction of competitors in formulating its economic policy.

Oligopoly is one of the most common market structures in the modern economy. In most countries, almost all branches of heavy industry (metallurgy, chemistry, automotive, electronics, ship and aircraft building, etc.) have just such a structure.

Figure 1 - Features of an oligopoly Microeconomics. Theory and Russian practice: textbook / kol. Auth.; ed. A.G. Gryaznova, A.Yu. Yudanov. M., 2006. P.354

The most noticeable feature of an oligopoly is the small number of firms operating in the market. However, one should not think that companies can literally be counted on the fingers.

In an oligopolistic industry, as in monopolistic competition, there are often many small firms along with large ones. However, a few leading companies account for the majority of the industry's total turnover, and it is their activities that determine the course of events.

Formally, oligopolistic industries usually include those industries where several largest firms (in different countries, from 3 to 8 firms are taken as a reference point) produce more than half of all output. If the concentration of production is lower, then the industry is considered operating in conditions of monopolistic competition.

In Russia, the raw material industries, ferrous and non-ferrous metallurgy are clearly oligopolistic; almost all sectors that managed to survive the current crisis and on which the domestic economy still relies.

The concentration of production in the hands of the 8 leading firms here ranges from 51 to 62%. Undoubtedly, the main sub-sectors of chemistry and mechanical engineering (production of fertilizers, automotive industry, aerospace industry, etc.) are also oligopolized.

In sharp contrast to them are the light and food industries. In these industries, the largest 8 firms account for no more than 10%. The state of the market in this area can be confidently characterized as monopolistic competition, especially since product differentiation in both industries is exceptionally large (for example, the variety of varieties of sweets that are produced not even by the entire food industry, but only by one of its sub-sectors - the confectionery industry) Economy of the industry: study guide / A.S. Pelikh et al. Rostov n/D, 2011. P.115.

Of course, the establishment of a quantitative boundary between oligopoly and monopolistic competition is largely arbitrary. After all, the two named types of market also have qualitative differences.

In monopolistic competition, the decisive cause of an imperfect market is product differentiation. In an oligopoly, this factor is also important. There are oligopolistic industries in which product differentiation is significant (for example, the automotive industry). But there are also industries where the product is standardized (cement, oil, and most metallurgy sub-sectors).

The main reason for the formation of an oligopoly is economies of scale. An industry acquires an oligopolistic structure if the large size of the firm provides significant cost savings and, therefore, if large firms in it have significant advantages over small ones.

However, there can never be many large firms in an industry. Already the multibillion-dollar value of their plants serves as a reliable barrier to the emergence of new companies in the industry.

In the usual course of events, a firm becomes larger gradually, and by the time an oligopoly is formed in the industry, a narrow circle of largest firms has actually been determined. In order to invade it, the "stranger" must immediately lay out such an amount that the oligopolists have gradually invested in the business over decades. Therefore, history knows only a very small number of cases when a giant company was created “from scratch” through one-time huge investments (we will refer to AvtoVAZ in the USSR and Volkswagen in Germany; it is characteristic that in both cases the state acts as an investor, i.e. non-economic factors played an important role in the formation of these firms).

But even if funds were found for the construction of a large number of giants, they would not be able to work profitably in the future. After all, the market capacity is limited. Consumer demand is enough to absorb the products of thousands of small bakeries or auto repair shops. However, no one needs metal in quantities that could smelt thousands of giant domains.

The main features of an oligopoly

One type of imperfect competition is oligopoly. It is a market structure, where there are from two to twenty-four large companies. This type of market is typical for industries that produce high-tech and complex products or services. Oligopolies exist in the supply of resources, in heavy industry, mechanical engineering, the chemical industry, aircraft and shipbuilding, the automotive industry, and others.

The main features of this market structure are the following:

Products in such a market can be homogeneous (for example, aluminum), or they can be differentiated (automotive). Then a distinction is made between pure and differentiated oligopolies.
The oligopoly has a large market share. For example, in America there are only eight companies that manufacture photography equipment. They account for 85% of the market.
Supply in the market is concentrated in the hands of a few large enterprises that determine sales volumes and prices.
Very high barriers to market entry. This is due to the fact that oligopolies mainly arise in high-cost areas of activity, where participants rationally use resources. In addition, government permits, licenses, patents may be required to enter the market, which also requires a certain amount of time and money.
The strong interconnection of oligopoly players leads to limited price control. Only the largest players can change prices under certain conditions.

Remark 1

Oligopoly is one of the most common forms of market structures. Usually it is formed during the natural self-regulation of the market, when weak enterprises gradually lose their customers and declare themselves bankrupt. Sometimes, market participants can agree and ruin a competitor, and then buy it completely, or buy out a controlling stake. The gradual takeover of weaker enterprises eventually leads to the formation of large corporations that divide the market among themselves.

In addition to competition, oligopolies are formed under the influence of business scaling. Since the above industries are high-cost, it is only by increasing the scale of production that enterprises manage to recoup their costs and make a profit. The large scale of enterprises allows them to maintain high barriers to entry for newcomers, since there is practically no free market share for them.

Characteristics of an oligopoly

The nature of an oligopoly is largely determined by its distinctive features. Compared to a monopoly market or a monopolistic competition market. Oligopoly is based on principles that are closest to real processes in the economy. So for monopolistic competition, science allows the production of homogeneous products, and for monopolies the creation of differentiated products. In an oligopoly, it is possible and actually produced products of both types.

Remark 2

For the convenience of analyzing a differentiated oligopoly, the entire group of produced substitutes is taken as a homogeneous product. Typically, such a market structure is characterized by the production of homogeneous goods and services.

A special position in understanding the nature of an oligopoly is occupied by price. On the one hand, the "market of a few" creates products for many small buyers who do not influence the price formation. On the other hand, the oligopolists themselves influence each other. Any price changes lead to a general shift in the industry. A decrease in sales can play into the hands of competitors, so an enterprise in an oligopoly needs to find its own balance of supply and demand that provides income.

Another feature of an oligopoly is the ability of its participants to negotiate. They can negotiate prices, or their thresholds. The beginning of a price war, considered in the Bertrand model, can lead to the fact that all market participants will reach zero profit, covering only their costs. When conspiring, it is also possible that one of the players will change their mind and act according to their own goals.

An oligopoly is characterized by high barriers to entry. However, everything here also depends on the "friendliness" of the participants in the oligopoly. When a new player enters, they can negotiate and set prices for products that can only cover the costs of the new player. So, they will force him to open a small enterprise with a high average cost, or a large enterprise that will not be able to pay off.

There are situations when participants in an oligopoly begin to raise prices for a product. For example, one of the participants is the price leader. Then there is a general decrease in sales, which frees up market share for newcomers.

Oligopoly (oligopoly) as a market model is a small number of jointly operating firms - manufacturers of a given product, which act together.

Oligopolistic type of market- a complex market situation when several companies sell a standardized or differentiated product, and the share of each participant in total sales is so large that a change in the quantity of products offered by one of the firms leads to a price change. Access to the oligopolistic market for other companies is difficult. Price control in such a market is limited by the interdependence of firms (except in the case of collusion). There is usually strong non-price competition in an oligopolistic market.

Why do oligopolies arise?

The answer is simple: where economies of scale are significant, sufficiently efficient production is possible only with a small number of producers. In other words, efficiency requires that the production capacity of each firm occupy a large share of the total market, and many small firms cannot survive.

The realization of economies of scale by some companies suggests that the number of competing manufacturers is simultaneously reduced due to bankruptcy or merger. For example, in the automotive industry during its formation there were more than 80 firms. Over the years, the development of mass production technologies, bankruptcies and mergers have weakened the struggle between manufacturers. Now in the US, the Big Three (General Motors, Ford and Chrysler) account for about 90% of sales of cars produced in the country.

The hallmarks of an oligopoly include:

o scarcity - dominance in the market of goods and services by a relatively small number of firms. Usually when we hear:

"big three", "big four" or "big six", it is obvious that the industry is oligopolistic;

o standardized or differentiated products- many industrial products (steel, zinc, copper, aluminum, cement, industrial alcohol, etc.) are standardized in the physical sense and are produced in an oligopoly. Many industries producing consumer goods (cars, tires, detergents, postcards, breakfast cereals, cigarettes, many household electrical appliances, etc.) are differentiated oligopolies;
o barriers to entry I am in an oligopolistic market - absolute cost advantage, economies of scale, the need for large start-up capital, product differentiation, patent protection for the production of goods;
o fusion effect- the reason for the merger may be different reasons, the merger of two or more firms enables the new company to achieve greater economies of scale and lower production costs;
o universal interdependence- no firm in an oligopolistic industry would dare to change its pricing policy without trying to calculate the most likely responses of its competitors.

Along with the oligopoly in the market, there are:

o duopoly- the type of industry market in which there are only two independent sellers and many buyers;
o oligopsony- a market in which there are several large buyers.

Determination of price and production volume

How are price and output determined in an oligopoly? Pure competition, monopolistic competition, and pure monopoly are fairly well-defined market classifications, while oligopoly is not. Exist like tough oligopoly, in which two or three firms dominate the entire market, and vague oligopoly, in which six or seven firms share, say, 70 or 80% of the market, while the competitive environment occupies the remainder.

The presence of different types of oligopoly prevents the development of a simple market model that will provide an explanation for oligopolistic behavior. The overall interdependence complicates the situation, and the inability of the firm to predict the response of its competitors makes it virtually impossible to determine the demand and marginal revenue facing the oligopolist. Without such data, the company cannot even theoretically determine the price and volume of production that will maximize its profit.

Figure 12.1 presents the methods of oligopolistic price control.

Rice. 12.1.

1. Studying Oligopolistic Pricing it is expedient to begin with the analysis of a broken curve of demand (fig. 12.2). It occurs when an oligopolist cuts prices below those set in the market in order to force his competitors to do the same. The figure shows that the demand curve is a broken line (/) 2 £ |), and the marginal revenue curve has a vertical gap. Therefore, no change in price R, neither occurs in the quantity of the product offered, indicating the price inflexibility that characterizes oligopolistic markets.

Within certain limits, any increase in prices worsens the market situation. Thus, a price increase by one firm carries the risk of market capture by competitors who, by maintaining low prices, can lure away its former buyers. However, lowering prices in an oligopoly may not lead to the desired increase in sales, since competitors, having duplicated this maneuver, will retain their quotas in the market. As a result, the leading firm will not be able to increase the number of buyers at the expense of other companies. In addition, this step is fraught with a dumping price war. The proposed model well explains only the inflexibility of prices, but does not allow determining their initial level and growth mechanism. The latter is easier to explain through the method of conspiracy of oligopolists.

Rice. 12.2.

2. Collusion (clandestine collusion, collusion) occurs when firms reach a tacit (not formally contracted) agreement to fix prices, allocate markets, or limit competition among themselves. Collusive oligopolists tend to maximize total profits. However, differences in demand and costs, the presence of a large number of firms, fraud through price discounts, recessions and antitrust laws are an obstacle to this form of price control.

Figure 12.3 shows that profit maximization (shaded rectangle) is achievable only if every firm in the oligopoly sets a price R and produces a volume of output equal to Q.

The desire of oligopolists to conspire contributes to the formation of cartels - associations of firms that agree on their decisions about prices and volumes of products. This requires the development of a joint policy, the establishment of quotas for each participant and the creation of a mechanism for monitoring the implementation of decisions made. The establishment of uniform monopoly prices increases the revenue of all participants in the collusion, but the price increase is achieved through a mandatory reduction in sales. At present, explicit cartel-type agreements are rare. It is much more common to observe implicit (hidden) agreements.

3. Leadership in prices, or price leadership (price leadership) - is an informal price fixing method whereby one firm (the price leader) announces a price change and the others follow

Rice. 12.3.

companies following the leader soon record identical changes. Maintaining the price at a certain level set by the leading firm is called a "price umbrella" (price umbrella). At the same time, the price leader actually performs a signal role, which eliminates the need for collusion. Essentially, it is the practice whereby the dominant firm, usually the largest or most efficient in the industry, changes its price, and all other firms automatically follow the change.

4. Pricing on the principle of "cost plus", or "cost plus" (traditional pricing, cost-plus pricing, markup pricing) - the traditional method of setting prices used by oligopolies. This is a pricing method in which the selling price is determined on the basis of the full cost of production by adding a "markup" to it in the amount of a certain percentage. This pricing method is not incompatible with collusion or price leadership. The well-known American company General Motors uses cost-plus pricing and is the price leader in the automotive industry.

Oligopoly Efficiency

Is an oligopoly an efficient market structure? There are two points of view on the economic consequences of an oligopoly.

According to the traditional view, an oligopoly operates similarly to a monopoly and can lead to the same results as a pure monopoly, although the oligopoly retains the external appearance of competition among several independent firms.

From the Schumpeter-Galbraith point of view, oligopoly promotes STP and therefore results in better output, lower prices, and higher levels of output and employment than if the industry were organized differently.

When industries are dominated by several firms, such industries are called oligopoly or

oligopoly name the type of market in which a few firms control the bulk of it. At the same time, product differentiation can be both small (oil) and quite extensive (cars). An oligopoly is characterized by restrictions on the entry of new firms into the industry, which are associated with economies of scale, high advertising costs, existing patents and licenses, and actions taken by competitors.

Characteristic signs of an oligopoly:

1. Small number of large firms in the industry(oligopolies can be homogeneous (oil, gas) and differentiated (cars)). With the characteristic dominance of oligopolies, the rule is applied: for the top 4 firms in total production in the industry (if more than 60%, then the industry is oligopolistic. Oligopolies usually exist in industries that produce technically complex goods or goods produced in small quantities.

2. A characteristic feature of an oligopoly is the merger and collusion of firms. The motives for merging can be different: voluntary (monopolists), forced (a large firm forces small firms to merge), general absorption (buying up small firms that are going bankrupt, etc.).

3. Unlike pure monopoly in the condition of monopolistic competition (industry), each firm is forced to calculate the response to its changes (the general interdependence of firms on a few firms).

Character traits:

1. several very large firms;

2. the product is standardized or differentiated;

3. price control limits interdependence;

4. the possibility of collusion on price, market division, etc.;

5. there are barriers to new firms entering the industry;

6. non-price competition;

7. supply and demand are not very elastic.

An oligopoly exists when the number of firms in an industry is so small that each firm must take into account the reaction of competitors when formulating its pricing policy. Another feature of an oligopoly is the interdependence of firms' decisions on prices and output.

Oligopoly types:

1. homogeneous (dense) - when firms produce the same product;

2. differentiated - when similar but not identical products are produced;

3. hard - when there are 3-4 firms in the industry;

4. vague - when there are 6-7 firms in the industry;

5. based on collusion;

6. not based on collusion firms are independent, but the leader sets the parameters of the market;

7. based on fusion association;

8. based on the production of technically complex goods, when there are few large firms in the industry, where there is a positive effect of scale of production.

Relationship types

According to the concentration of sellers in the same market, oligopolies are divided into dense and sparse.

To dense oligopolies include such industry structures that are represented on the market by 2-8 sellers.

To the discharged oligopolies include market structures that include more than 8 business entities.

Based on the nature of the products offered, oligopolies can be divided into ordinary and differentiated.

Ordinary oligopoly associated with the production and supply of standard products.

Differentiated oligopolies formed on the basis of the production of a diverse range of products.

General assessment of oligopolistic structures

Positive rating oligopolistic structures is associated primarily with the achievements of scientific and technological progress. Oligopolies have huge financial resources, as well as significant influence in the political and economic circles of society, which allows them to participate in the implementation of profitable projects and programs financed from public funds with varying degrees of accessibility.